How to Start a Non-profit – Step 3: Filing for Tax-Exempt Status

This fall, we’re creating blogs focused on various resources charities might need. This blog is part of a series focused on becoming a registered 501(c)(3) nonprofit organization from a Zealous Good team member who has done it before! Stay tuned throughout the next few months for direction on Registering for an EIN, Filing for Tax-Exempt Status, and little bits of advice!5938286966_d2e0d5463c_o

Step #3: Filing for Tax Exempt Status (501(c)(3)): Part 1

As mentioned in the first and second posts on how to start a non-profit, I highly recommend hiring a lawyer to navigate through the overall process of becoming a nonprofit organization.  Given how expensive lawyers can be, the idea behind this blog series is to gather the information your lawyer will eventually need – hopefully cutting back on the hours spent (and charged to your new nonprofit)!

The longest and final step to becoming a nonprofit is filling out Form 1023 to submit to the IRS.

You will need Form 1023: Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code (it can be found here. If you want to fill it out on your computer, you can go here). The form is divided into eleven sections.  I will go one-by-one and try to clarify anything that may not be intuitive, or point out what you should have prepared for your lawyer.

Section 1: Identification of Applicant: this just includes the basic information about your organization: name, contact information, and when your Articles of Incorporation was filed.

For #10: Gross receipts are the total amounts the organization received from all sources during a tax year, without subtracting any expenses. See Appendix B on Form 1023 for more details.

  • Form 990: must be filed by an organization exempt from income tax if it has either (1) gross receipts greater than or equal to $200,000 or (2) total assets greater than or equal to $500,000 at the end of the tax year.
  • Form 990-EZ: If an organization has gross receipts less than $200,000 and total assets at the end of the tax year less than $500,000
  • Form 990-N: If an organization normally has gross receipts of $50,000 or less

Section 2: Organizational Structure: here you will need a copy of your Articles of Incorporation and your bylaws.
Section 3: Required Provisions: You will need to state where in your Articles of Incorporation you included:

  • A clause stating that your corporation was formed for a recognized tax-exempt purpose
  • A clause stating that assets of the NPO that remain if the entity dissolves will be distributed to another 501(c)(3) organization, or the government. If you do not have this included in your bylaws, the state government will dissolve the organization according to its laws.

Section 4: Narrative Description of your Activities: They want a detailed narrative of all of your organization’s activities and future activities, in order of the amount of time and resources devoted to each (include a percentage). Write about:

  • How will each activity further an exempt purpose of your organization?
  • When each activity began or will begin
  • Where/whom is involved?
  • How will the activities be funded?

If your organization has a brochure describing your activities, you can provide this instead.

Section 5: Compensation & Finances: You must include the names, titles, addresses, qualifications, number of hours to work, duties, and all proposed compensation to the current directors and officers, the top five paid employees (not directors or officers) making over $50,000 annually (include 401K, bonuses, employer contributions, etc.), the top five paid independent contractors paid over $50,000 annually, and list any possible conflict of interests.

  • This is where using the interactive form I posted above comes in handy.  If you have a long list of employees or contractors, it will allow you to add more rows to the table.  If you answered “yes” to either of the bulletpoints above, you can insert a field with descriptions, instead of attaching a form at the end.
  • “Common control” means that you and one or more other organization have either a majority control of governing boards/officers or a majority of your governing boards/offiers consist of the same individuals.  It can also occur when you and one or more commonly controlled organizations have a majority ownership interest in a corporation, partnership, or trust.

Section 6: Compensation & Others Receiving Benefits: The IRS just wants to make sure your organization is set up to provide to all members of the public (or a segment of the public), and it is not limited to particular individuals.

Section 7Your History: The IRS just wants to know if you took over the activities of another organization or if you were a previous organization/corporation.  If you took over more than 25% assets of a preexisting NPO, you need to disclose it here.

Section 8: Your Specific Activities: You must list your fundraising activities, including the time spent on each, here.  This includes other organizations raising money for your organization.

  • Your organization can not be involved with supporting or opposing a candidate in a political campaign.
  • If you are using any type of gambling to raise funds (from casino nights to BINGO events) be sure to do a little research as far as what is allowed with a tax-exempt status.
  • If you will have any operations in foreign countries, they will also be listed here.  You should review the Office of Foreign Assets Control (OFAC) Specially Designated Nationals List (SDN) to ensure you do not give money to anyone on the list.  This can be found here.

Section 9: Financials:  This is one section your lawyer likely will need a lot of your help or the help of your accountant.  It starts with a pretty simple, itemized statement of revenues, but it will take a little sifting through your records to answer some of them.  The second part is a Balance Sheet from the most recent tax year, which hopefully you will have already prepared previously.

  • Don’t forget that donated items still count as donations.  You need to include the cash value of any donations.
  • The IRS requires you submit your financial data for the most recent five years.  This form has slots for the current year and the last three years. I don’t know why they haven’t modified the form. We had to submit two more years of data after our initial review, and had to wait longer to get our status.

Section 10: Public Charity Status: This section is different depending on if you are a public charity or a private foundation.  

Secton 11: User Fees: This one’s an easy one – just tell them what your average annual gross receipts are, and it will tell you how much you need to pay them.

And finally, here is a checklist to make sure you have everything you need before sending it over:

Now, you play the waiting game! We waited over a year for our status to be approved.  You can see where the IRS is in approving status here:

  • I suggest writing a compelling letter to your congressman asking for assistance in expediting your application.
  • There is a chance the IRS will request more information. Don’t be discouraged – they usually respond very quickly once your application has had its initial review. However, you will always have a week or two deadline to submit the information they request. DO NOT WAIT. They will throw out your application if they do not receive the requested information postmarked by the deadline.

You’re now one step closer to becoming a nonprofit, and even better, one step closer to becoming an eligible Zealous Good nonprofit member!  Meanwhile, as you’re organizing things for that new office, don’t forget to donate those unneeded items to Zealous Good!

Michelle Retson is a Community Engagement Manager at Zealous Good, an in-kind donations marketplace in Chicago. Her family founded the nonprofit, Healing, Health, & Hope. You can find Michelle on Google+, or Zealous Good on Facebook and on Twitter at @ZealousGood.

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